Pay Transparency Laws and Equity Compensation

US public companies are accustomed to disclosing the compensation of their top executives, but what about the pay of lower ranking employees? While not nearly as extensive as the SEC’s executive compensation disclosures, many states, cities, and countries have begun requiring disclosures relating to general workforce compensation. These laws can apply to both public and private companies and you won’t be surprised to learn that some can apply to equity compensation.

A new video chat by Baker McKenzie provides an excellent summary of the types of pay transparency and disclosure laws that exist today and how they can apply to stock compensation. The video features Elizabeth Ebersole of Baker McKenzie interviewing three of her peers at the firm: Krissy Katzenstein, Barbara Klementz, and Dionna Shear. Here is a summary of my takeaways from the video.

Lots of Laws and Lots of Jurisdictions

Movements like this often start at the local level before working their way up to the national stage; that’s certainly the case with pay transparency laws. As a result, in the United States, pay transparency laws vary by state and even by city. Even for companies that only have employees in the United States, it can be a lot to keep track of.

Many other countries have adopted pay transparency and disclosure laws at the national level. Multinational companies must stay on top of these laws as well.

The Many Flavors of Pay Transparency Laws

As explained by Krissy Katzenstein in the video, most countries and many US states have laws that prohibit discrimination when it comes to employee pay or that require equal pay for equal, or sometimes similar, work. But that is about where the similarities end. The laws governing pay disclosure and transparency can vary significantly by jurisdiction.

Affirmative Reporting: Some jurisdictions have affirmative pay reporting requirements, meaning that employers must submit their pay data to a government agency. Sometimes this data must be reported by demographic groupings, such as gender or ethnicity.

Data Maintenance: Other jurisdictions require employers to maintain pay data and make it available for government audits or inspections.

Internal Requirements: Some jurisdictions have taken the approach of requiring employees to develop internally focused processes. Krissy gives the example of Finland, which requires employers to maintain gender equality plans and disclose these plans to their employees.

Pay Gap Reporting: Other countries require employers to report pay discrepancies, such as gender pay gaps, to a government agency. One interesting aspect of this approach is that these reports are often then made public.

Salary History Bans and Salary Range Disclosures: Many jurisdictions prohibit employers from requesting a salary history of job candidates. In addition, many have implemented salary range disclosure requirements. In the video, Dionna Shear explains that salary range disclosure requirements can be affirmative, reactive, or a hybrid.

Affirmative reporting requirements are those that obligate employees to proactively disclose salary ranges to prospective (e.g., in job postings) or current employees. Reactive requirements obligate employers to provide this information upon request. And hybrid requirements do both. Dionna points to California as an example of a hybrid requirement: the state requires employers to disclose the salary range for job postings and to disclose the range for a current employee’s position upon request.

How Do Pay Transparency Laws Apply to Equity Awards?

Many laws requiring disclosure of compensation apply only to base salary. In the video, Barbara Klementz explains, however, that some jurisdictions require some level of disclosure for bonuses, commissions, and other forms of pay, such as stock compensation.

Barbara points out that salary range disclosure laws adopted in Washington and Colorado also require job listings to include a general description of other forms of compensation that positions are eligible for. These other forms of compensation would likely include stock compensation. In fact, the Washington law specifically includes stock options as an example of a type of other compensation that must be described.

Barbara expects to see more laws like this adopted in states and cities. New York City has a proposal currently pending that would expand its salary range disclosure law to also cover non-salary and non-wage forms of compensation, including stock and options (along with many other types of compensation).

Pay Gap Reporting and Equity Compensation

Barbara points out in the video that, because stock compensation is often a significant component of pay, it makes sense to include stock awards in public pay gap reports, even if not expressly required. While this reporting isn’t yet required in the United States, it is required by certain other countries, such as the UK.

One unresolved question is how to value equity awards for purposes of pay gap reports. Barbara explains that this often isn’t addressed in the laws requiring these reports. This is an area of law that is still evolving; additional guidance from regulators or future case law may provide clarification.

In the meantime, employers have three choices for valuing equity:

• Fair value at grant
• Taxable income
• Current intrinsic value

Each method has disadvantages. Using the fair value at grant aligns with a company’s accounting cost (usually) but doesn’t reflect actual amounts realized by employees. Taxable income is more reflective of wealth created for employees but can vary, sometimes considerably, by country and also may be affected by employee decisions (such as exercise timing or tax elections). Using the current intrinsic value also won’t necessarily reflect the actual wealth created for employees under the arrangements.  

Check Out the Video

Baker McKenzie’s short video is well worth your time; check it out today.